What Does RMB Internationalization Mean to the US multinationals?

Through most of its history, the value of the RMB was pegged to the U.S. dollar. As China pursued its gradual transition from central planning to a free market economy, and increased its participation in foreign trade, the RMB was devalued to increase the competitiveness of Chinese industry.

Since 2005, the RMB exchange rate has been allowed to float in a narrow margin around a fixed base rate determined with reference to a basket of world currencies. The Chinese government has announced that it will gradually increase the flexibility of the exchange rate. China has initiated various pilot projects to "internationalize" the RMB in the hope that it will become a reserve currency the long term.

The big first step is to allow banks and companies to settle payments with cross-border trading partners in RMB. Simply, a US multinational can now pay a Chinese supplier in RMB, and a qualified Chinese buyer can pay a US supplier in RMB. 

All of this is great news for the US multinationals. For US companies selling in China, if their customers have the necessary clearance to get their onshore RMB payments converted to offshore RMB, US treasurers will have a lot more flexibility with the cash they generated and have better control of the exposure to RMB-to-US dollar appreciation.  

Also many US companies that have struggled to benefit from the excess RMB they have piled up on the mainland will benefit from the RMB internationalization.  Known as a long-standing problem, due to the Chinese government regulations, it has been very difficult to get money out of China. Now these RMB-rich US companies will be able to use their excess RMB in certain cross-border trading.  Will US companies convert their offshore RMB in HK to US dollars and sent it back to the US headquarter?  Some companies in need of cash in the US might do that. But I think, in most cases, US companies would have little motivation to do so considering 1) the heavy US tax on profit repatriation; 2) the potential appreciation of RMB.  A sophisticated treasurer would have the opportunity to use a base of RMB deposit to set up a multinational notional pooling, which can recycle excess RMB into a US dollar pool to fund the rest of the company's operation without the balance sheet cost.

Experts say that RMB could be fully convertible by 2015.  The Chinese government definitely has made the decision to head into that direction, but it is dealing with the conversion process with great caution, we shall stay tuned on further developments.  I look forward to sharing more on this topic with my blog readers in the near future.